PwC Voluntary tax reporting of the top 100 companies listed on the JSE
DURBAN - SA’s top companies are increasingly taking a more transparent approach in reporting on their tax affairs, with companies disclosing their tax strategy, performance, as well as their total tax contribution.
This comes in the wake of mounting pressure on companies for tax disclosure from tax authorities, governments, the public and other stakeholders. Companies which are leading in the transparency and disclosure space are developing a holistic response to the ever-changing tax landscape. Their voluntary disclosures are based on which information stakeholders are interested in and what they want to know.
These are some of the key findings from a review of the voluntary tax reporting of the top 100 companies listed on the JSE issued by PwC today. The review summarises trends that are shaping the tax transparency landscape and provides examples of how companies are responding by using voluntary tax disclosures, thereby demonstrating corporate citizenship as responsible taxpayers.
The companies that were reviewed are the top 100 JSE listed companies by market capitalisation as at 31 December 2018. PwC has developed a tax transparency framework and the performance of each company was quantitatively assessed against the framework. The framework is intended to guide companies in developing a transparency strategy that is fit for purpose.
Gert Meiring, Tax Reporting & Strategy Lead for PwC Southern Africa, said, "Mistrust between society and large corporates is currently at an all-time high, which leads to a challenging tax landscape. For many stakeholders it’s no longer enough for organisations to view their tax position by way of financial reporting. Increasingly, organisations are being challenged to provide more information to stakeholders".
He added, "Governments, the public, employees, investors and the media are looking for evidence that organisations are committed to building a more sustainable and inclusive economy and are becoming a visible part of society, with senior executives and governing bodies explaining how their organisations’ tax strategies are responsible and align with their sustainability commitments".
Findings of PwC’s report
This year our study incorporated an assessment of the manner and effectiveness in which companies communicated their tax information.
Meiring said that the practices of the companies featured in our analysis show that some are taking a proactive approach to certain aspects of voluntary tax transparency, as they start to deal with an increasing amount of tax reporting guidance. However, the statistics indicate that most companies elect to only focus on mandatory tax reporting.
On average, companies scored 38.5 percent for effectively providing transparency of taxes and for integrating it with other company-related disclosures to provide a sense of value reporting on tax disclosure.
The telecommunications sector received the highest overall voluntary tax transparency rating (29 percent), followed by the basic material sectors (23 percent). These findings are mainly due to the telecommunications sector experiencing a highly regulated and tax environment in Africa There is also an expectation that extractive companies (which form part of the basic materials industry classification) will be more proactive in tax transparency disclosures due to their exposure to international initiatives that aim to improve the voluntary transparency of their industry’s tax disclosures.
It is notable that only 17 percent of companies disclosed their tax strategy publicly and 5 percent for indicating how the tax strategy is linked to the business and sustainable development strategies of the organisation and the broader economic needs of the countries in which the organisation operates.
Other common trends of more proactive voluntary disclosure were identified
1. 24 percent for indicating that tax risk is discussed at the board/audit committee level;
2. 23 percent of discussing changes to tax legislation/tax policy and its impact on the business;
3. 33 percent for providing a clear and understandable tax rate reconciliation;
4. 23 percent for providing a breakdown of the different types of taxes it pays.
A tax transparency strategy
Locally and globally, several initiatives have been issued on voluntary and transparent tax disclosure that stakeholders would find useful in order to understand a company’s tax affairs.
In South Africa, the King IVᵀᴹ Report on Corporate Governance (King IVᵀᴹ) has brought substance to the requirements of being a responsible taxpayer. King IVᵀᴹ suggests disclosure on issues such as a board’s tax strategy and tax governance structure. The report also suggests that the organisation’s board and audit committee should be responsible for a tax strategy. In other parts of the world, policy makers are actively involved in the design of transparency standards.
International frameworks such as the UN-supported Principles for Responsible Investment and the Global Reporting Initiative (GRI) include tax transparency within their scope. The newly developed GRI 207: Tax 2019 is the first public global standard for comprehensive tax disclosures. GRI 207 enables organisations to communicate on their tax practices to a wide stakeholder community under a standard set by an independent standard setting body.
The benefit of providing more information about tax to stakeholders
Organisations need to consider what information is already provided to respond to stakeholders’ needs, what other information the company might want to provide and what the risks and benefits are of providing or withholding information. Depending on the organisations’ needs, it is vital to find the right focus and balance.
How technology will impact the tax transparency agenda
Technology advances mean that the quality and quantity of tax data available to companies and their stakeholders will increase. In order to establish a digitally tax function, organisations need to look at solving problems in a completely new way. The tax function needs to understand how different technologies such as robotic process automation, artificial intelligence, blockchain and advanced analytics are being used and can be used. In addition, the tax function needs to bear in min that tax authorities are using these tools. Accordingly, tax leadership should engage with company leadership and commit to the next steps in the evolution of its tax function.
Tax transparency and sustainability
Companies are urged to place sustainability at the heart of their operations as a key driver for competitiveness. Stakeholders increasingly want to understand an organisation’s long-term value creation plans through credible, standardised information. Many organisations are responding by incorporating environmental, social and governance information in their messaging. However, organisations are only just beginning to consider their messaging on the positive contribution to society they make through the taxes they pay. Tax is a sustainability issue as it is a major way in which companies contribute to the economies and countries in which they operate.
What voluntary tax transparency means for today’s tax function
The role of tax functions is changing. They need to focus on developing skills in areas that were not traditionally deemed important for tax. These include the ability to build relationships and engage with stakeholders to influence decisions in which the participants share a common interest relating to tax.
"There are a range of approaches to disclosure and it is important to consider the purpose of each transparency initiative and the value that it will bring to the taxpayer and its stakeholders," said Meiring.
For some companies where the business case is insufficient, there will be little activity in this area. Others, however, have dedicated the time and energy to developing voluntary disclosures and driving the debate on tax transparency. The central question should be "Transparency for who, and what purpose?".
The trend towards increased tax transparency is unlikely to slow down and will remain a real issue that all businesses will need to contend with. Chief Executives in Africa recognise the opportunity to build their own brands, but as social, political and economic events hit the boardroom, they also recognise the need to step forward to make a meaningful contribution and rebuild business confidence for the long term.
Meiring said that tax can be a ‘strategic asset’ in this process. There is value in integrating a tax transparency communication strategy and reporting on sustainability and economic impact. Open dialogue with stakeholders and easily accessible information about tax can demonstrate value creation for all stakeholders, improve business reputation by building trust and reinforce the licence to operate.
He recommends that companies demonstrate that their actions meet stakeholder expectations and are consistent with brand values. Companies that are getting their tax messaging right have identified material tax-related communications and embedded these into their long-term value-creation story.
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